What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-19 compared with 2020-11-06 · 137 added, 216 removed, 136 unchanged (72% of the section changed)

18 unchanged sentences

Forward-looking statements include statements regarding our strategies as well as (1) our revenue levels, including the commercial success of our solutions and new products, (2) the conversion of our design opportunities into revenue, (3) our liquidity, (4) our gross profit and breakeven revenue level and factors that affect gross profit and the break-even revenue level, (5) our level of operating expenses, (6) our research and development efforts, (7) our partners and suppliers, (8) industry and market trends, (9) our manufacturing and product development strategies and (10) our competitive position.

The following discussion should be read in conjunction with the attached unaudited condensed consolidated financial statements and notes thereto, and with our audited consolidated financial statements and notes thereto for the fiscal year ended December 29, 2019, found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 13, 2020.

The following discussion should be read in conjunction with the attached Unaudited Condensed Consolidated Financial Statements and notes thereto, and with our audited consolidated financial statements and notes thereto for the fiscal year ended January 3, 2021, found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 23, 2021.

Although we believe that the assumptions underlying the forward-looking statements contained in this Quarterly Report are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements will be accurate.

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We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise that may arise after the date of this Quarterly Report on Form 10-Q.

We develop low power, multi-core semiconductor platforms and intellectual property (“IP”) for artificial intelligence (“AI”) voice and sensor processing.

The solutions include an eFPGA for hardware acceleration and pre-processing, and heterogeneous multi-core System on Chip (“SoCs”) that integrate eFPGA with other processors and peripherals.

The SensiML Analytics Toolkit from wholly owned subsidiary, SensiML Corporation (“SensiML”) completes the “full stack”

We develop low power, multi-core semiconductor platforms and IP for AI, voice and sensor processing.

The solutions include an eFPGA for hardware acceleration and pre-processing, and heterogeneous multi-core SoCs that integrate eFPGA with other processors and peripherals.

The SensiML Analytics Toolkit from our recently acquired wholly owned subsidiary, SensiML completes the “full stack”

end-to-end solution with accurate sensor algorithms using AI technology.

The full range of platforms, software tools and eFPGA IP enables the practical and efficient adoption of AI, voice and sensor processing across mobile, wearable, hearable, consumer, industrial, edge and endpoint IoT applications. 

Our solutions are created from our new silicon platforms including our EOS™, QuickAI™, SensiML Analytics Studio, ArcticLink®

Our new products include our EOS™, QuickAI™, SensiML Analytics Studio, ArcticLink®

III, PolarPro®3, PolarPro II, PolarPro, and Eclipse II products (which together comprise our new product category).

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in 2017, which is included in the new product revenue category.

Through our wholly owned subsidiary SensiML, we now have an AI software platform that includes Software-as-a-Service (“SaaS”) subscriptions for development, per unit license fees when deployed in production, and proof-of-concept services, all of which are also included in the new product revenue category.

Our solutions typically fall into one of three categories:

Through the acquisition of SensiML, we now have an IoT AI software platform that includes SaaS subscriptions for development, per unit license fees when deployed in production, and proof-of-concept services –

all of which are also included in the new product revenue category.

Our semiconductor solutions typically fall into one of three categories:

Sensor Processing, Display and Visual Enhancement, and Smart Connectivity.

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All of our silicon platforms are standard devices and must be programmed to be effective in a system.

Our IP that enables always-on context-aware sensor applications includes our Flexible Fusion Engine, our Sensor Manager and Communications Manager technologies as well as IP that (i) improves multimedia content, such as our Visual Enhancement Engine technology, and Display Power Optimizer technology;

and (ii) implements commonly used mobile system interfaces, such as Low Voltage Differential Signalling, Mobile Industry Processor Interface, and Secure Digital Input Output.

We provide complete solutions by first architecting the solution jointly with our customer’s or ecosystem partner’s engineering group, selecting the appropriate solution platform and Proven System Blocks (“PSBs”), providing custom logic, integrating the logic, programming the device with the PSBs and/or firmware, providing software drivers or application software required for the customer’s application, and supporting the customer on-site during integration, verification and testing.

In many cases, we deliver software algorithms that have been optimized for use in a QuickLogic silicon platform.

Our core IP also includes the SensiML AI Toolkit that enables original equipment manufacturers (“OEMs”) to develop AI software for a broad array of resource-constrained time-series sensor endpoint applications.

Our IP that enables always-on context-aware sensor applications includes our Flexible Fusion Engine, our Sensor Manager and Communications Manager technologies as well as IP that (i) improves multimedia content, such as our Visual Enhancement Engine, or VEE, technology, and Display Power Optimizer, or DPO, technology;

and (ii) implements commonly used mobile system interfaces, such as Low Voltage Differential Signaling, or LVDS, Mobile Industry Processor Interface, or MIPI, and Secure Digital Input Output, or SDIO.

Through the acquisition of SensiML, our core IP also includes the SensiML AI Toolkit that enables OEMs to develop AI software for a broad array of resource-constrained time-series sensor endpoint applications.

These include a wide range of consumer and industrial sensing applications.

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Through reference designs that incorporate our solutions, we believe mobile processor manufacturers, sensor manufacturers, and sensor and voice algorithm companies can expand the available market for their respective products.

Furthermore, should a solution developed for a processor manufacturer or sensor and/or sensor algorithm company be applicable to a set of common OEMs or Original Design Manufacturers (“ODMs”), we can amortize our Research and Development (“R&D”) investment over that set of OEMs or ODMs.

Furthermore, should a solution developed for a processor manufacturer or sensor and/or sensor algorithm company be applicable to a set of common OEMs or Original Design Manufacturers, or ODMs, we can amortize our Research and Development, or R&D, investment over that set of OEMs or ODMs.

There may also be cases when platform providers that intend to use always-on voice recognition will dictate certain performance requirements for the combined software/hardware solution before the platform provider certifies and/or qualifies our product for use by end customers.

Our ArcticPro eFPGA IP is currently developed on 65nm, 40nm and 22nm process nodes.

The licensable IP is generated by a compiler tool that enables licensees to create an eFPGA block that they can integrate into their SoC without significant involvement by us.

We believe this flow enables a scalable support model for us.

In addition to working directly with our customers, we partner with other companies that are experts in certain technologies to develop additional IP, reference platforms and system software to provide application solutions, particularly in the area of hardware acceleration for AI-type applications.

In June 2020, we announced the QuickLogic Open Reconfigurable Computing (“QORC”) Initiative, developed in conjunction with Google and Antmicro.

The QORC initiative encompasses QuickLogic device support via multiple open source tools, including:

the SymbiFlow open source FPGA toolchain, the Renode open source simulation framework for rapid prototyping, development and testing of multi-node systems, the Zephyr Real-Time Operating System (RTOS), and an open source development kit.

We also work with mobile processor and communications semiconductor device manufacturers and companies that supply sensor, algorithms and applications.

The depth of these relationships vary depending on the partner and the dynamics of the end market being targeted, but they are typically a co-marketing relationship that includes joint account calls, promotional activities and/or engineering collaboration and developments, such as reference designs.

For our sensor processing solutions, we collaborate with sensor manufacturers to ensure interface compatibility.

We also collaborate with sensor and voice/audio software companies, helping them optimize their software technology on our silicon platforms in terms of performance, power consumption and user experience.

For our eFPGA strategy, we work with semiconductor manufacturing partners to ensure our eFPGA IP is proven for a given foundry and process node before it is licensed to an SoC company.

Our ArcticPro eFPGA IP are currently developed on 65nm, 40nm and 22nm process nodes.

The licensable IP is generated by a compiler tool that enables licensees to create an eFPGA block that they can integrate into their SoC without significant involvement by QuickLogic.

We believe this flow enables a scalable support model for QuickLogic.

For our eFPGA strategy, we work with semiconductor manufacturing partners to ensure our eFPGA IP is proven for a given foundry and process node before it is licensed to a SoC company.

In order to grow our revenue from its current level, we depend upon increased revenue from our new products including existing new product platforms, eFPGA IP and platforms currently in development.

We expect our business growth to be driven mainly by our silicon solutions, eFPGA IP, open source tools, and SensiML AI Software.

We expect our business growth to be driven mainly by our silicon solutions, eFPGA IP and SensiML AI Software.

Therefore, our revenue growth needs to be strong enough to enable us to sustain profitability while we continue to invest in the development, sales and marketing of our new solution platforms, IP and software.

During the third quarter of 2020, we generated total revenue of $1.8 million, which represents a decrease of 19% compared to the second quarter of 2020 and 18% compared to the third quarter of 2019.

Our new product revenue in the third quarter was $639,000, which represents a decrease of 22% from the prior quarter and 37% from the third quarter of 2019.

Our mature product revenue was $1.1 million in the third quarter of 2020, which represents a decrease of 17% from the prior quarter and flat compared to the third quarter of 2019.

We are expecting revenue growth from EOS S3, SensiML AI SaaS, and eFPGA IP licensing in fiscal year 2021.

We continue to seek to expand our revenue, including pursuing high-volume sales opportunities in our target market segments, by providing solutions incorporating IP, or industry standard interfaces.

Our industry is characterized by intense price competition and by lower margins as order volumes increase.

While winning large volume sales opportunities will increase our revenue, we believe these opportunities may decrease our gross profit as a percentage of revenue.

During the first quarter of 2021, we generated total revenue of $2.2 million, which represents a decrease of 10% compared to the prior quarter and an increase of 4% compared to the same quarter last year.

Our new product revenue in the first quarter was $1.1 million, which represents an increase of 28% from the prior quarter and increase of 121% from the first quarter of 2020.

Our mature product revenue was $1.2 million in the first quarter of 2021, which was a decrease of 30% compared to the prior quarter and a decrease of $507,000 compared to the first quarter of 2020.

We expect our mature product revenue to continue to fluctuate over time.

We devote substantially all of our development, sales and marketing efforts to our new sensor processing solutions using our EOS TM S3 platforms, derivative products based on software-driven features, development of additional new products and solution platforms, our new eFPGA IP licensing and QuickAI initiatives.

Overall, we reported a net loss of $2.1 million for the third quarter of 2020, a decrease of 31% compared with the prior quarter and a decrease of 52% compared with the third quarter of 2019.  

Overall, we reported a net loss of $1.7 million for the first quarter of 2021, a decrease of 43% compared with the prior quarter and a decrease of 47% 

compared with the first quarter of 2020.  

We have experienced net losses in the recent years and expect losses to continue through at least fiscal year 2021 as we continue to develop new products, applications and technologies.

Whether we can achieve cash flow levels sufficient to support our operations cannot be accurately predicted.

Unless such cash flow levels are achieved in addition to the proceeds we received from our recent sale of our equity securities, we may need to borrow additional funds or sell debt or equity securities, or some combination thereof, to provide funding for our operations, and such additional funding may not be available on commercially reasonable terms, or at all.

COVID-19 Response

 The COVID-19 pandemic and its potential effects on the Company’s business in its fiscal 2020 and beyond remain uncertain.

It is expected that there will be further restrictions by the governmental authorities as a result of an impending surge in COVID-19 cases during the winter of 2020.

The COVID-19 pandemic and its effects on the Company’s business in its fiscal 2020, the first quarter of fiscal 2021, and potential effects on the remainder of fiscal 2021 and beyond remain uncertain.

There have been further restrictions by the governmental authorities as a result of a surge in COVID-19 cases during the winter of 2020 and continuing into fiscal 2021.

These restrictions and other impacts from COVID-19 could cause further disruptions or restrictions on the Company’s ability to source, manufacture or distribute its products, including temporary disruptions to the facilities of its contract manufacturers in China, Taiwan, Philippines and Singapore, or the facilities of its suppliers and their contract manufacturers globally.

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If COVID-19 cases surge and the Company experiences more pronounced disruptions in its operations, the Company may experience constrained supply or curtailed demand that may materially adversely impact its business and results of operations.

The extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic, restrictions on travel, transportation and other containment measures, the success and availability of the recent vaccine, our compliance with these measures and the impact on our employees, customers, contractors and supply chain, all of which are uncertain and cannot be predicted.

Restructuring

In January 2020, we implemented a restructuring plan to lower annual operating expenses. The restructuring plan was approved by our Board of Directors on January 24, 2020.

Pursuant to the restructuring plan, we recorded $479,000 restructuring charges during the first quarter of fiscal year 2020, consisting primarily of employee severance related costs and facilities costs.

There were no restructuring charges incurred in the quarter ended April 4, 2021.

Our employees and customers

Our top priority during the ongoing COVID-19 pandemic remains the health and safety of our employees and their families, as well as our customers.

As global governments institute restrictions 

on commercial operations, we are working to ensure our compliance while also maintaining business continuity for operations.

As global governments institute restrictions on commercial operations, we are working to ensure our compliance while also maintaining business continuity for operations.

Most of our personnel continue to work from home except few personnel, who are required for minimum operations.

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Our global offices remain operational to meet customer needs during the pandemic in compliance with the orders and restrictions imposed by local authorities in each of our locations, and we are working with our customers to meet their specific shipment needs.

While the pandemic has created delays on the inbound supply chain at our partners and our own facilities and both inbound and outbound logistical challenges, we have been able to identify alternative solutions such that none of the issues have had a material impact on our ability to fulfil demand.

In anticipation of further COVID-19 related disruptions to our business, we have undertaken a comprehensive review of our spending plans and expect to reduce discretionary spending in future periods while maintaining an ongoing focus on key initiatives.

Our balance sheet is well positioned and had $24.7 million of cash, cash equivalents and restricted cash as of September 27, 2020, including the draw-down of $15.0 million from revolving credit facility maturing in September 2021 and net proceeds of $8.1 million received from the equity offering, after deducting the commissions and other stock issuance expenses.

On May 6, 2020, we entered into a loan agreement with Heritage Bank for a loan of $1.2 million pursuant to the Paycheck Protection Program (“PPP Loan”) under the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 (“CARES Act”).

On June 5, 2020, the President of the United States of America signed into law the Paycheck Protection Flexibility Act (“PPPFA”) to address many concerns expressed by the small business community around the Paycheck Protection Program.

PPPFA among other changes (i) reduced the amount of the loan required to be spent on payroll from 75% to 60%, thus increasing the amount of funds available for other expenses from 25% to 40%, (ii) extended the period to spend the loans to 24 weeks from 8 weeks, (iii) amended the June 30 deadline to rehire workers to December 31, 2020, (iv) eased rehire requirements, and (v) extended the repayment term of the PPP Loan from 2 years to 5 years.

For the loans disbursed before June 5, 2020, PPPFA provides the option to opt for 24 weeks for spending the loan instead of 8 weeks.

The Company has opted for 24 weeks to spend the PPP Loan.

As of September 27, 2020, the Company fully utilized the loan proceeds in compliance with PPPFA guidelines.

The Company expects to apply for the full loan forgiveness in the fourth quarter of 2020.

However, Forgiveness of this loan will be recognized if/when legal release is received.

The extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic, restrictions on travel, transportation and other containment measures, our compliance with these measures and the impact on our employees, customers, contractors and supply chain, all of which are uncertain and cannot be predicted.

The COVID-19 pandemic and its potential effects on the Company’s business in its fiscal 2020 remain dynamic, and the broader implications for its business and results of operations remain uncertain.

These implications could include further disruptions or restrictions on the Company’s ability to source, manufacture or distribute its products, including temporary disruptions to the facilities of its contract manufacturers in China, Taiwan, Philippines and Singapore, or the facilities of its suppliers and their contract manufacturers globally.

Additionally, multiple countries have imposed and may further impose restrictions on business operations and movement of people and products to limit the spread of COVID-19.

Delays in production or delivery of components or raw materials that are part of the Company’s global supply chain due to restrictions imposed to limit the spread of COVID-19 could delay or inhibit its ability to obtain the supply of components and finished goods.

If COVID-19 becomes more prevalent in the locations where the Company, its customers or suppliers conduct business, or the Company experiences more pronounced disruptions in its operations, the Company may experience constrained supply or curtailed demand that may materially adversely impact its business and results of operations.

In addition, any other widespread health crisis that could adversely affect global and regional economies, financial markets and overall demand environment for the Company's products could have a material adverse effect on the Company’s business, cash flows or results of operations.

Critical Accounting Estimates

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements.

The methodologies, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our Unaudited Condensed Consolidated Financial Statements.

The SEC has defined critical accounting policies as those that are most important to the portrayal of our financial condition and results of operations and require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.

Based on this definition, our critical policies include revenue recognition, valuation of inventories, including identification of excess quantities and product obsolescence, valuation of investments, valuation of long-lived assets, valuation of goodwill, capitalized internal-use software and related amortizable lives and intangibles related to the acquisition of SensiML, including the estimated useful lives of acquired intangible assets, measurement of stock-based compensation and estimation of accrued liabilities.

We believe that we apply judgments and estimates in a consistent manner and that this consistent application results in consolidated financial statements and accompanying notes that fairly represent all periods presented.

We believe that we apply judgments and estimates in a consistent manner and that this consistent application results in our financial statements and accompanying notes that fairly represent all periods presented.

However, any factual errors or errors in these judgments and estimates may have a material impact on our financial statements.

During the three and nine months ended September 27, 2020, there were no changes in our critical accounting policies from our disclosure in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, filed with the SEC on March 13, 2020, except for the new accounting standards adopted in the first quarter of 2020 as described in Note 2 to the condensed consolidated financial statements as of and for the three and nine months ended September 27, 2020.

For a discussion of critical accounting policies and estimates, please see Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 29, 2019, filed with the SEC on March 13, 2020.

See also Note 2 to the Unaudited Condensed Consolidated Financial Statements as of and for the three and nine months ended September 27, 2020 for the details of the newly adopted accounting standards.

During the three months ended April 4, 2021, there were no changes in our critical accounting policies from our disclosure in our Annual Report on Form 10-K for the fiscal year ended January 3, 2021, filed with the SEC on March 23, 2021, except for the new accounting standards adopted in the first quarter of 2021 as described in Note 2 to the Unaudited Condensed Consolidated Financial Statements as of and for the three months ended April 4, 2021 filed herewith. For a discussion of critical accounting policies and estimates, please see Item 7 in our Annual Report on Form 10-K for the fiscal year ended January 3, 2021, filed with the SEC on March 23, 2021.

Results of Operations

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Three Months Ended

Nine Months Ended

September 27,

September 29,

September 27,

September 29,

Cost of revenue

2 unchanged sentences

Selling, general and administrative

Restructuring (1)

Restructuring costs

Loss from operations

Interest expense

Interest income and other (expense), net

Gain on forgiveness of debt

Interest income and other income (expense), net

Loss before income taxes

Provision for (benefit from) income taxes (1)

_________________

Provision for income taxes

Insignificant percentages are rounded to zero percentage (0%) for disclosure

Three Months Ended September 27, 2020 Compared to Three Months Ended September 29, 2019

The table below sets forth the changes in revenue for the three months ended September 27, 2020, as compared to the three months ended September 29, 2019 (in thousands, except percentage data):

Three Months Ended April 4, 2021 Compared to Three Months Ended March 29, 2020

The table below sets forth the changes in revenue for the three months ended April 4, 2021, as compared to the three months ended March 29, 2020 (in thousands, except percentage data): 

Three Months Ended

September 27, 2020

September 29, 2019

Revenue by product line (1):

April 4, 2021

March 29, 2020

Mature products

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For all periods presented - New products include all products manufactured on 180 nanometer or smaller semiconductor processes, eFPGA IP license, QuickAI and SensiML AI SaaS revenues.

Mature products include all products produced on semiconductor processes larger than 180 nanometer.

The net decrease of $376,000 in the revenue of new products was primarily due to a decrease of connectivity product revenue, which was partially offset by increase in other new product revenue.

Mature product revenue was flat compared to the third quarter of 2019.

The table below sets forth the changes in gross profit for the three months ended September 27, 2020 as compared to the three months ended September 29, 2019 (in thousands, except percentage data):

Mature products include all products produced on semiconductor processes larger than 180 nanometer and includes related royalty revenue.

Product revenue for the first quarter of 2021 compared to the first quarter of 2020 was relatively unchanged.

The net increase of $589,000 in the revenue of new products was primarily due to increases of connectivity and sensor product revenue.

The net decrease of $507,000 in mature product revenue compared to the first quarter of 2020 was due primarily to decreases in PASIC 3, QuickRAM, ECLP and QECL products, partially offset by an increase in other products and an increase in royalty revenue.

The table below sets forth the changes in gross profit for the three months ended April 4, 2021 as compared to the three months ended March 29, 2020 (in thousands, except percentage data):

Three Months Ended

September 27, 2020

September 29, 2019

April 4, 2021

March 29, 2020

Cost of revenue

In the third quarter of 2020, gross profit was lower by $118,000 or 11% as compared to the same quarter in the prior year.

This was primarily due to the product mix shipped during the quarter.

The sale of previously reserved inventory was $26,000 and $31,000 in the third quarters of 2020 and 2019, respectively.

In the first quarter of 2021, gross profit was higher by $29,000 or 3% as compared to the same quarter in the prior year.

This was primarily due to an increase in revenue of 4% this quarter as compared to last year.

The sale of previously reserved inventory was $12,000 and $17,000 in the first quarters of 2021 and 2020, respectively.

Our semiconductor products have historically had long product life cycles and obsolescence has not been a significant factor in the valuation of inventories.

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Operating Expenses

The table below sets forth the changes in operating expenses for the three months ended September 27, 2020, as compared to the three months ended September 29, 2019 (in thousands, except percentage data):

The table below sets forth the changes in operating expenses for the three months ended April 4, 2021, as compared to the three months ended March 29, 2020 (in thousands, except percentage data):

Three Months Ended

September 27, 2020

September 29, 2019

Restructuring expense

April 4, 2021

March 29, 2020

Restructuring costs

Total operating expenses

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Our R&D expenses consist primarily of personnel, overhead and other costs associated with System on Chip (SoC) and software development, programmable logic design, AI and eFPGA development.

The $1.8 million decrease in R&D expenses in the third quarter of 2020, as compared to the third quarter of 2019, was primarily attributable to the lower compensation costs, including lower stock based compensation due to the restructuring plan implemented in January 2020.

Lower outside services costs and lower travel expenses due to COVID-19 also contributed to the decrease of R&D expenses.

The $68,000 increase in R&D expenses in the first quarter of 2021, as compared to the first quarter of 2020, was primarily attributable to a mix of offsetting increases and decreases.

The increase in Research and Development costs was related primarily to stock based compensation, allocable expenses and other, offset by reduced salary and related expenses, outside services, facility and depreciation expenses related primarily to our restructuring activities in the first quarter of fiscal 2020, due to reduced spending related to our restructuring plan implemented in January 2020 and to reduced spending related to the COVID-19 pandemic.

Selling, General and Administrative

Our selling, general and administrative (“SG&A”) expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, administration, human resources and general management. The $617,000 decrease in SG&A expenses in the third quarter of 2020, as compared to the third quarter of 2019 was primarily attributable to lower compensation costs, including stock-based compensation, due to the restructuring plan implemented in January 2020.

Further, lower outside services costs and lower facilities costs due to cost reduction measures and lower travel costs due to COVID-19 also contributed to the decrease of SG&A expenses.

Our selling, general and administrative (SG&A) expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, administration, human resources and general management.  The $68,000 increase in SG&A expenses in the first quarter of 2021, as compared to the first quarter of 2020 was primarily attributable to outside legal and consulting costs, offset by a decrease in stock-based compensation and reduced travel and entertainment related to the company’s restructuring in the first quarter of 2020 and reductions in spending related to COVID-19 restrictions.

Restructuring

In January 2020, the Company implemented a restructuring plan to lower annual operating expenses.

The restructuring plan was approved by the Company’s Board of Directors on January 24, 2020.

Pursuant to the restructuring plan, the Company recorded $624,000 of restructuring charges during the nine months of fiscal year 2020, including $111,000 in the third quarter, consisting primarily of employee severance related costs and facilities costs.

See Note 1 to the Condensed Consolidated Financial Statements for details.

Interest Expense and Interest Income and Other Expense, Net

The table below sets forth the changes in interest expense and interest income and other (expense), net for the three months ended September 27, 2020 as compared to the three months ended September 29, 2019 (in thousands, except percentage data):

In January 2020, we implemented a restructuring plan to lower annual operating expenses.

The restructuring plan was approved by our Board of Directors on January 24, 2020.

Pursuant to the restructuring plan, we recorded restructuring costs of $0 in the first quarter of 2021 as compared to $479,000 in the first quarter of 2020.

Restructuring costs consists primarily of employee severance-related costs and facilities costs.

See Note 1 to the Unaudited Condensed Consolidated Financial Statements for details.

Interest Expense and Interest Income and Other Income (Expense), Net

The table below sets forth the changes in interest expense and interest income and other income (expense), net for the three months ended April 4, 2021 as compared to the three months ended March 29, 2020 (in thousands, except percentage data):

Three Months Ended

September 27,

September 29,

Interest expense

Interest income and other expense, net

Interest expense relates primarily to the Company's line of credit facility and the PPP Loan.

Interest income and other expenses, net, relates to the interest earned on our money market accounts and foreign exchange gain or losses recorded.

Gain on forgiveness of debt

Interest income and other income (expense), net

Total interest income and other income (expense), net

* Percentage change was omitted as the result was not meaningful.

Interest expense relates primarily to our line of credit facility.

Interest income and other income (expense), net, relates to the interest earned on our money market accounts and foreign exchange gain or losses recorded. Changes in interest expense related for our revolving loan relate to the variability and timing of our outstanding loan balance. Interest rates for the first quarter of this year as compared to the prior year were significantly lower, accounting for most of the decrease.

Gain on forgiveness of debt relates to the gain related to the forgiveness of the PPP loan of $1.2 million for the three months ended April 4, 2021 . Other interest income and other income (expense), net for this period was approximately $8,000, approximately flat compared with the three months ended March 29, 2020.

Provision for Income Taxes

The table below sets forth the changes in the provisions for income tax for the three months ended September 27, 2020 as compared to the three months ended September 29, 2019 (in thousands, except percentage data):

The table below sets forth the changes in the provisions for income tax for the three months ended April 4, 2021 as compared to the three months ended March 29, 2020 (in thousands, except percentage data):

Three Months Ended

September 27,

September 29,

Provision for income taxes

The majority of the income tax expense for the quarter ended September 27, 2020 and September 29, 2019 relates to the Company's foreign subsidiaries, which are cost-plus entities.

The Company is subject to U.S.

The majority of the income tax expense for the quarter ended April 4, 2021 and March 29, 2020 relates to our foreign subsidiaries, which are cost-plus entities.

Included in the provision for the quarter ended April 4, 2021, was a $125,000 deferred tax provision 

related to a one time repatriation of funds from our India entity.

We are subject to U.S.

federal income tax as well as income taxes in many U.S.

states and foreign jurisdictions in which the Company operates.

tax years from 1999 forward remain effectively open to examination due to the carryover of unused net operating losses and tax credits.    

Nine Months Ended September 27, 2020 and September 29, 2019

The table below sets forth the changes in revenue for the nine months ended September 27, 2020, as compared to the nine months ended September 29, 2019 (in thousands, except percentage data):

Nine Months Ended

September 27, 2020

September 29, 2019

Revenue by product line (1):

Mature products

Total revenue

For all periods presented:

New products include all products manufactured on 180 nanometer or smaller semiconductor processes, eFPGA IP license, QuickAI and SensiML AI SaaS revenues.

Mature products include all products produced on semiconductor processes larger than 180 nanometers.

The $468,000 decrease in the revenue of new products was primarily due to decreased shipment of connectivity and display products, which was partially offset by the increase in EOS S3 revenue recognized in the first nine months of 2020.

The $837,000 decrease in the revenue of mature products was primarily due to decreased orders from our customers in the aerospace, military and industrial sectors.

The table below sets forth the changes in gross profit for the nine months ended September 27, 2020, as compared to the nine months ended September 29, 2019 (in thousands, except percentage data):

Nine Months Ended

September 27, 2020

September 29, 2019

Cost of revenue

The $1.0 million or 25% decrease in gross profit was primarily due to product mix changes, lower shipments of high margin mature products and additional test costs to support the higher volume of products shipped to our primary smartphone customer in the first nine months of 2020 compared to the first nine months of 2019.

The sale of previously reserved inventory was $59,000 and $95,000 in the first nine months of 2020 and 2019, respectively.

Operating Expenses

The table below sets forth the changes in operating expenses for the nine months ended September 27, 2020, as compared to the nine months ended September 29, 2019 (in thousands, except percentage data):

Nine Months Ended

September 27, 2020

September 29, 2019

Restructuring expenses

Total operating expenses

Research and Development

Our R&D expenses consist primarily of personnel, overhead and other costs associated with, sensor processing and algorithm development, programmable logic design, SoC software and eFPGA development.

The $4.2 million decrease in R&D expenses in the first nine months of 2020, as compared to the first nine months of 2019 was primarily attributable to the restructuring plan implemented in January 2020, which resulted in lower compensation related costs, lower consulting and outside services expenses.

Cancellation of performance based restricted stock units contributed to lower stock based compensation.

Decrease in travel expenses also contributed to lower R&D expenses. 

Selling, General and Administrative

Our SG&A expenses consist primarily of personnel and related overhead costs for sales, marketing, finance, administration, human resources and general management. The $1.9 million decrease in SG&A expenses in the first nine months of 2020, as compared to the first nine months of 2019, was primarily due to a decrease of compensation-related costs, including stock-based compensation expenses, lower outside services expenses and facility costs due to restructuring plan implemented in January 2020.

Decrease in travel expenses also contributed to lower SG&A expenses.

Interest Expense and Interest Income and Other Expense, Net

The table below sets forth the changes in interest expense and interest income and other (expense), net for the nine months ended September 27, 2020 as compared to the nine months ended September 29, 2019 (in thousands, except percentage data):

Nine Months Ended

September 27,

September 29,

Interest expense

Interest income and other expense, net

Interest expense relates primarily to the Company's line of credit facility and the PPP Loan.

Interest income relates to the interest earned on our money market account and foreign exchange gains or losses recorded.    

Provision for Income Taxes

The table below sets forth the changes in the income tax provisions for the nine months ended September 27, 2020 as compared to the nine months ended September 29, 2019 (in thousands, except percentage data):

Nine Months Ended

September 27,

September 29,

Provision for (benefit from) income taxes

Income tax expense for the nine months ended September 27, 2020 relates to the relates to the Company's foreign subsidiaries, which are cost-plus entities.

A majority of the income tax benefit for the nine months ended September 29, 2019 relates to the deferred tax benefit arising from Intangible assets acquired from the acquisition of SensiML.

As of September 27, 2020, our ability to utilize our income tax loss carryforwards in future periods is uncertain, and accordingly, we recorded a full valuation allowance against the related U.S.

tax provision.

We will continue to assess the realizability of deferred tax assets in future periods.

states and foreign jurisdictions in which we operate.

tax years from 1999 forward remain effectively open to examination due to the carryover of unused net operating losses and tax credits.    

Liquidity and Capital Resources

We have financed our operating losses and capital investments through sales of common stock, finance leases, a revolving line of credit and cash flows from operations.

As of September 27, 2020, the Company's principal sources of liquidity consisted of cash, cash equivalents and restricted cash of $24.7 million, including $15.0 million line of credit with Heritage Bank.

We repaid the $15.0 million outstanding under our Revolving Facility on September 28, 2020.

On June 22, 2020, the Company closed an underwritten public offering of 2.5 million shares of common stock, $0.001 par value per share at a price of $3.50 per share.

The Company received a total gross proceeds from the offering of approximately $9.3 million, including $0.5 million received from the overallotment under the terms of the underwriting agreement.

Under the terms of the underwriting agreement, the Company granted the underwriter a 30-day option to purchase up to an additional 375,000 shares of common stock to cover overallotments.

On July 21, 2020, the underwriter’s partially exercised the option to purchase 141,733 additional shares of common stock in connection with the offering, resulting in additional net proceeds to the Company of approximately $0.5. The Company incurred a total of approximately $1.2 million for underwriting discounts and other stock issuance costs.

Total net proceeds received from this offering was $8.1 million after deducting underwriting discounts and other stock issuance costs. See Note 8 to the Unaudited Condensed Consolidated Financial Statements for the details.

On June 5, 2020, the President of the United States of America signed into law the PPPFA, to address many concerns expressed by the small business community around the Paycheck Protection Program.

See Note 6 to the Unaudited Condensed Consolidated Financial Statements and COVID-19 Response above for more details.

For the loans disbursed before June 5, 2020, PPPFA provides the option to opt for 24 weeks for spending the loan instead of 8 weeks.

The Company has opted for 24 weeks to spend the PPP Loan. 

On May 6, 2020, we entered into a loan agreement with Heritage Bank for a loan of $1.2 million pursuant to the Paycheck Protection Program under the CARES Act enacted on March 27, 2020.

The principal and interest of the PPP Loan are repayable in 18 monthly equal installments of $67,065.21 each starting in December 2020.

Interest accrued in the first six months is included in the monthly installments.

Installments must be paid by the fifth calendar day of each month. The loan amount can be fully or partially forgiven if the funds are used as per revised guidelines under the PPPFA.

As of September 27, 2020, the Company fully utilized the loan funds complying PPPFA guidelines.

The Company expects to apply for the loan forgiveness in the fourth quarter of 2020. Forgiveness of this loan will be recognized if/when legal release is received.

On November 6, 2019, the Company entered into a First Amendment to the Amended and Restated Loan Agreement (“First Amendment”) with Heritage Bank to extend the maturity date of the Revolving Facility for one year through September 28, 2021.

The Company has financed its operations and capital investments through sales of common stock, finance and operating leases, a revolving line of credit and cash flows from operations.

As of April 4, 2021, the Company's principal sources of liquidity consisted of cash, cash equivalents and restricted cash of $20.9 million, including $15.0 million drawn down from its revolving line of credit with Heritage Bank of Commerce (“Heritage Bank”) and $1.2 million loan received under the Paycheck Protection Program (“PPP”) which was subsequently forgiven.

On September 28, 2018, the Company entered into a Loan and Security Agreement (the "Loan Agreement"), with Heritage Bank.

The Loan Agreement provided for, among other things, a revolving line of credit facility (the “Revolving Facility”) with aggregate commitments of $9.0 million. 

On December 21, 2018, the Company entered into an Amended and Restated Loan and Security Agreement (the “Amended and Restated Loan Agreement”) with Heritage Bank to replace in its entirety the Loan Agreement.

The Amended and Restated Loan Agreement increased the Revolving Facility from $9.0 million to $15.0 million. The Amended and Restated Loan Agreement requires the Company to maintain at least $3.0 million in unrestricted cash at Heritage Bank.

On November 6, 2019, the Company entered into a First Amendment to the Amended and Restated Loan Agreement with Heritage Bank to extend the maturity date for one year through September 28, 2021 (the “First Amendment”).

Under this First Amendment, the Revolving Facility advances shall bear interest, on the outstanding daily balance thereof, at a rate per annum equal to the greater of (i) one half of one percentage point (0.50%) above the Prime Rate, or (ii) five and one half of one percentage points (5.50%).

We were in compliance with all loan covenants under the Amended and Restated Loan Agreement as of the end of the current reporting period.

On June 21, 2019, we completed an underwritten public offering of 1.3 million shares of common stock, at a price of $7.00 per share, which included 171,429 shares issued pursuant to the underwriters’

full exercise of their over-allotment option.

We received net proceeds from the offering of approximately $8.0 million, net of underwriter’s commission and other offering expenses.

See Note 8 to the Unaudited Condensed Consolidated Financial Statements for the details.

On December 21, 2018, we entered into an Amended and Restated Loan and Security Agreement (“Amended and Restated Loan Agreement”) with Heritage Bank to replace in its entirety the Loan and Security Agreement entered into with Heritage Bank on September 28, 2018.

The Amended and Restated Loan Agreement increased the Revolving Facility from $9,000,000 to $15,000,000. The Amended and Restated Loan Agreement requires us to maintain at least $3,000,000 in unrestricted cash at Heritage Bank.

As of September 27, 2020, we had $15.0 million of outstanding revolving line of credit with an interest rate of 5.5%.

We believe that our existing cash, cash equivalents and restricted cash, together with available financial resources from the revolving facility with Heritage Bank, and the funds raised from our equity offering that closed in June and July 2020 will be sufficient to fund our operations and capital expenditure and provide adequate working capital for the next twelve months.

The PPP Loan obtained in May 2020, and the proceeds from our equity offering in June and July 2020 helped us to remain in compliance with our debt covenants.

See Note 6 to the Unaudited Condensed Consolidated Financial Statements for details.

Over the longer term, we anticipate that the generation of sales from our new and mature product offerings, existing cash and cash equivalents, together with financial resources from our Revolving Facility with Heritage Bank and our ability to raise additional capital in the public capital markets will be sufficient to satisfy our operations and capital expenditures.

Our Revolving Facility with Heritage Bank matures in September 2021, which we plan to renew or find an alternative lender prior to the maturity date.

Further, any violations of debt covenants may restrict our access to any additional cash draws from the revolving line of credit, and may require our immediate repayment of the outstanding debt amounts.

We believe that we will be able to either renew the Revolving Facility or obtain alternative financing on the acceptable terms.

However, we cannot provide any assurance that PPP Loan will be forgiven or we cannot provide any assurance that we will be able to raise additional capital, if required, or that such capital will be available on terms acceptable to us.

Our inability to generate sufficient sales from our new product offerings and/or raise additional capital if needed could have a material adverse effect on our operations and financial condition, including our ability to maintain compliance with our lender’s financial covenants.

As of September 27, 2020, most of our cash, cash equivalents and restricted cash were invested in the money market account at Heritage Bank.

As of September 27, 2020, our interest-bearing debt consisted of $620,000 outstanding under finance leases, $1.2 million of PPP loan and $15.0 million outstanding under our Revolving Facility.

We repaid the $15.0 million outstanding under our Revolving Facility on September 28, 2020.

See Note 1 and 6 to the Unaudited Consolidated Financial Statements for more details.

Cash balances held at our foreign subsidiaries were approximately $330,000 and $548,000 as of September 27, 2020 and December 29, 2019, respectively.

On December 11, 2020, the Company entered into a Second Amendment (the “Second Amendment”) to the Amended and Restated Loan Agreement with Heritage Bank.

The Second Amendment extended the loan maturity date for one year through September 28, 2022 and amended the interest to a rate per annum equal to one half of one percentage point (0.50%) above the prime rate.

The Company was in compliance with all loan covenants as of April 4, 2021.

As of April 4, 2021, the Company had $15.0 million of outstanding revolving line of credit with an interest rate of 3.75%.

On May 6, 2020, the Company entered into a loan agreement with Heritage Bank for a loan of $1.2 million pursuant to the PPP under the CARES Act enacted on March 27, 2020.

On January 26, 2021, the Company received notice from Heritage Bank that amounts under the loan agreement had been forgiven. See Note 5 to these Unaudited Condensed Consolidated Financial Statements for the details.

On June 22, 2020, the Company closed an underwritten public offering of 2.5 million shares of common stock, $0.001 par value per share at a price of $3.50 per share.

The Company received total gross proceeds from the offering of approximately $9.3 million, including $0.5 million received from the overallotment under the terms of the Underwriting Agreement to purchase up to an additional 375,000 shares.

Underwriters partially exercised the option to purchase 141,733 additional shares of Common Stock.

The Company incurred approximately $1.2 million of stock issuance costs for this offering.

Total net proceeds received from this offering was $8.1 million after deducting underwriting discounts and other stock issuance costs.

The Company currently uses its cash to fund its working capital to accelerate the development of next generation products and for general corporate purposes.

Based on past performance and current expectations, the Company believes that its existing cash and cash equivalents, together with available financial resources from the Revolving Facility with Heritage Bank, will be sufficient to fund its operations and capital expenditures and provide adequate working capital for the next twelve months. 

Various factors can affect the Company’s liquidity, including, among others:

the level of revenue and gross profit as a result of the cyclicality of the semiconductor industry, the conversion of design opportunities into revenue, the market acceptance of existing and new products including solutions based on its ArcticLink®, PolarPro®

platforms, eFPGA, EOS S3 SoC, Quick AI solution, and SensiML software tools, the fluctuations in revenue as a result of product end-of-life, the fluctuations in revenue as a result of the stage in the product life cycle of its customers’

products, the costs of securing access to and availability of adequate manufacturing capacity, the levels of inventories and wafer purchase commitments, customer credit terms, the amount and timing of research and development expenditures, the timing of new product introductions, production volumes and product quality, sales and marketing efforts, the value and liquidity of its investment portfolio, changes in operating assets and liabilities, the ability to obtain or renew debt financing and to remain in compliance with the terms of existing credit facilities, the ability to raise funds from the sale of equity in the Company, the ability to capitalize on synergies with our newly acquired subsidiary SensiML;

the issuance and exercise of stock options and participation in the Company’s employee stock purchase plan and other factors related to the uncertainties of the industry and global economics.

Over the longer term, the Company anticipates that sales generated from its new product offerings and existing cash and cash equivalents, with financial resources from its Revolving Facility with the Heritage Bank and its ability to raise additional capital in the public capital markets, will be sufficient to satisfy its operations and capital expenditures.

However, the Company cannot provide any assurance that it will be able to raise additional capital, if required, or that such capital will be available on terms acceptable to the Company.

The inability of the Company to generate sufficient sales from its new product offerings and/or raise additional capital if needed could have a material adverse effect on the Company’s operations and financial condition, including its ability to maintain compliance with its lender’s financial covenants

As of April 4, 2021, most of our cash, cash equivalents and restricted cash were invested in the money market account at Heritage Bank.

As of April 4, 2021, our interest-bearing debt consisted of $626,000 outstanding under finance leases and $15.0 million outstanding under our Revolving Facility. See Note 6 and Note 5 to the Unaudited Condensed Consolidated Financial Statements for more details.

Cash balances held at our foreign subsidiaries were approximately $756,000 and $342,000 as of April 4, 2021 and January 3, 2021, respectively.

Earnings from our foreign subsidiaries are currently deemed to be indefinitely reinvested.

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In summary, our cash flows were as follows (in thousands):

Nine Months Ended

September 27,

September 29,

Three Months Ended

Net cash (used in) operating activities

Net cash (used in) investing activities

Net cash provided by financing activities

Net cash (used in) financing activities

Net cash (used in) operating activities

For the nine months ended September 27, 2020, net cash used in operating activities was $5.1 million, which was primarily due to the net loss of $8.2 million, adjusted for non-cash charges of $1.3 million.

Non-cash charges consisted primarily of $601,000 of stock-based compensation and depreciation and amortization expenses of $644,000.

Cash inflows from changes in operating assets and liabilities were $1.7 million, primarily due to decrease of accounts receivable due to lower sales and better collections, decrease of inventory due to shipping existing inventory, decrease of prepaid assets due to amortizations and VAT receipts and increase of trade payable due to timing of payments.

For the nine months ended September 29, 2019, net cash used in operating activities was $8.8 million, which was primarily due to the net loss of $12.4 million, adjusted for non-cash charges of $3.2 million.

Non-cash charges consisted primarily of stock-based compensation of $2.5 million.

Other non-cash charges were depreciation, amortization of property, equipment, intangible assets, and right of use lease assets, and a write-down of inventory.

Cash inflows from changes in operating assets and liabilities were $1.6 million, which were offset by cash outflows of $1.2 million.

For the three months ended April 4, 2021, net cash used in operating activities was $1.0 million, which was primarily due to the net loss of $1.7 million, adjusted for non-cash charges of $647,000 including the gain recognized from the forgiveness of the PPP loan of $1.2 million.

Other non-cash charges consisted primarily of $368,000 of stock-based compensation and depreciation and amortization expenses of $162,000.

Cash inflows from changes in operating assets and liabilities were $1.3 million, primarily due to a decrease in trade receivables from our collection efforts and an increase in accrued liabilities subject to the variability of the timing of payments, partially offset by an increase in other assets.

For the three months ended March 29, 2020, net cash used in operating activities was $2.2 million, which was primarily due to the net loss of $3.2 million, adjusted for non-cash charges of $112,000. Non-cash charges consisted primarily of $398,000 net gain from reversal of stock-based compensation expense of $265,000.

The net gain from the reversal of stock-based compensation was a result of the cancellation of certain performance based RSUs, as established goals required for vesting were not achieved and cancellation of RSUs due to restructuring related terminations. Cash inflows from changes in operating assets and liabilities were $1.1 million, primarily due to a decrease in inventory and a decrease in trade receivables.

Net cash (used in) investing activities

For the nine months ended September 27, 2020, cash used in investing activities was $762,000, which was primarily attributable to the capitalized internal-use software and capital expenditure relating to leasehold improvements and computer equipment.

For the nine months ended September 29, 2019, cash used in investing activities was $579,000, which was primarily attributable to capital expenditure relating to leasehold improvements and computer equipment at the new office premises.

Net cash provided by financing activities

For the nine months ended September 27, 2020, cash provided by financing activities was $9.0 million, which was primarily derived from the net proceeds of $8.1 million from the stock issuance of 2.5 million shares of common stock in June 2020 and overallotment of 141,733 shares to underwriters in July 2020, proceeds from the PPP Loan of $1.2 million, partially offset by scheduled repayments of $179,000 for finance lease obligations.

For the nine months ended September 29, 2019,cash provided by financing activities was $7.7 million, primarily attributable to the net proceeds of $8.0 million from the issuance of 18.4 million shares of common stock issued in June 2019, and net proceeds from the issuance of common stock under our equity plans.

These inflows were partially offset by scheduled repayments of finance lease obligations and tax payments related to net settlement of stock awards

For the three months ended April 4, 2021, cash used in investing activities was $283,000, which was primarily attributable to the capitalized internal-use software and capital expenditure relating to leasehold improvements and computer equipment.

For the three months ended March 29, 2020, cash used in investing activities was $290,000, which was primarily attributable to capital expenditure relating to leasehold improvements and computer equipment at the new office premises.

Net cash (used in) financing activities

Cash flows from financing activities includes the draw-downs and repayments of our line of credit. 

For the first quarter of 2021 and 2020, these draw-downs and repayments netted to zero.

For the three months ended April 4, 2021, cash used in financing activities was $527,000, which was primarily attributable to taxes paid relating to stock-based compensation equity awards. 

We continue to use and repay our revolving line of credit as our cash needs require.

For the three months ended March 29, 2020 cash used in financing activities was $85,000, primarily attributable to the scheduled repayments of finance lease obligations and tax payments related to net settlement of stock awards, partially offset by net proceeds from the issuance of common stock under our equity plans.

Contractual Obligations and Commercial Commitments

The following table summarizes our contractual obligations and commercial commitments as of September 27, 2020 including the PPP Loan received in May 2020 and the effect such obligations and commitments are expected to have on our liquidity and cash flows in future fiscal periods (in thousands):

The following table summarizes our contractual obligations and commercial commitments as of April 4, 2021 and the effect such obligations and commitments are expected to have on our liquidity and cash flows in future fiscal periods (in thousands):

Payments Due by Period

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We are committed to accept the delivery of and pay for a portion of forecasted wafer volume.

As of April 4, 2021, we have no contractual obligations or commercial commitments beyond three years.

Concentration of Suppliers

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See Note 2 to the Unaudited Condensed Consolidated Financial Statements for a description of recent accounting pronouncements, including the respective dates of adoption and expected effects on the results of our operations and financial condition.

Quantitative and Qualitative Disclosures about Market Risk

Not Applicable.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis